Congress still has not yet passed a budget. The Congressional Budget Office and the Bipartisan Policy Center predict that the government will hit the debt ceiling by this October. Wall Street appears nervous about the possibility of a looming debt ceiling and a potential U.S. debt default.
Treasury Secretary Steven Mnuchin has told Congress that, if it does not take action on the debt ceiling by September 29, the government will not be able to pay its bills. While most analysts believe Congress will act in time, the uncertainty weighs on Wall Street.
Congress can raise the debt ceiling by a certain amount, which can run out at an undetermined time, or lawmakers can suspend the debt ceiling until a certain date, which would allow the debt ceiling to be increased by an undetermined amount. Most recently, Congress suspended the debt ceiling from November 2, 2015 to March 15, 2017. During that time frame, Treasury was able to take on more debt to pay its obligations.
Raising the debt ceiling requires an act of Congress and has previously been a point of contention between the Republican and Democratic parties. House Minority Leader Nancy Pelosi has indicated Democrats would support a clean debt ceiling increase, but it is unclear whether the Republican majorities in both chambers would support it.
The government does not automatically default on debt when it hits the debt ceiling. Instead, the Treasury Department can implement a limited set of “extraordinary measures,” or borrowing loopholes, to keep paying the debts. Treasury began extraordinary measures most recently on March 15, 2017. It has been estimated that those measures, which are what Treasury Secretary Mnuchin estimated will be exhausted by September 29, have cost taxpayers $2.5 billion.
As the deadline approaches, inaction could further damage the U.S. government’s financial credibility, adding to borrowing costs. If the deadline comes and goes, markets will likely react with alarm, but the United States will not technically default until its next debt payment comes due. But even crossing that line briefly, could leave permanent scars on the economy, as the previous debt fights have.
